I don't mean the claim by my Republican friends that federal spending under President Obama is out of control and increasing wildly. That is an outright lie that is easily enough debunked elsewhere. Almost anywhere really.
What I'm talking about are interest rates. Specifically, the rates the federal government pays to borrow money. As of the close of markets Friday, the going rate on a 10-year treasury bond was 1.47%
Now throw this into your fact blender and shake it up. The inflation rate last year was 3.16%. Over the last 10 years it's averaged 2.43% You see where I'm going with this? Probably not. I'll spell it out for you.
Give just a quick glance to those numbers, and you'll see that the Federal Government can borrow a chunk of change, and be obligated to pay it back over 10 years in dollars that will be worth less than those it borrowed, even after interest payments.
Which means the Feds are currently making a profit by borrowing money for 10 years. Wish I could pull off a trick like that. If it weren't for the fact they would just blow most of the cash on stupid army shit, I'd say the government isn't borrowing nearly enough.
7 comments:
Good ol' GWB jr. may turn out to be the beginning of the end for America as top dog. A trillion plus to run some father son grudge match/ super sized training event. The soon to be appearing INFLATION will be used to kick down the debt. Give your banker a big kiss too.
Mort D. Arthur
And on the other side if the coin, the government wants to increase the rate on student loans. Welcome to the machine.
Um, while for everybody and everything else in the world your thesis makes perfect sense, it doesn't really compute to say that "the government can borrow money and pay it back for less than it will be worth." The *reason* it will be worth less is *because the government borrowed it* - which, in an age of central banking, is *how the government prints money.* There is zero difference, economically-speaking, between the government borrowing the money and putting it into circulation by using it to pay for things, and the government just printing the money and put it into circulation by using it to pay for things.
Well, there is a difference, but it's that borrowing the money creates additional overhead costs and a minus-sum problem. So it's actually worse. But that's pretty esoteric and the point is, as a matter of practical observation, the two actions are the same over the short to medium term.
If your logic were sound, then there would be absolutely no reason for the government not to borrow infinite amounts of money, or near to it as makes no never mind, and, in the words of the great Stephen King, "Hump it right the Christ into circulation."
What, we're blaming this on Bush One and Bush Two??
Marc,
You're smarter than average, but not quite smart enough.
The difference between the government selling debt and just cranking up the printing presses is that letting investors buy treasuries and collect interest is precisely one of the things that gives a dollar any value. When all hell breaks loose in the world economy and people want a rock solid safe investment, they create a demand for treasuries, which means treasuries, and the dollars that back them, are worth something. There is great demand for US debt these days, which is why we've seen interest rates driven to these almost unprecedented low levels. If the feds borrow a billion dollars today by selling off 10 year notes, they will be obligated to pay back 1.15 billion over 10 years. No matter what. Even if all hell breaks loose here and we end up carting around million dollar bills in wheelbarrows to buy a loaf of bread. The feds still pay back 1.15 billion. Feds win.
If we just start cranking out the money to meet today's needs and send inflation through the roof however, we'll be obligated to pay future debts at whatever tomorrow's dollar is worth. Feds lose.
And with today's 10 year t-note rates around 1.5% the Feds will pretty much win no matter what. That's the point of this post.
But wait. There's more. Because global demand for dollars gives them value, we DO, within reason, have the ability to print more dollars and get away with it. That's a benefit of having the global reserve currency. This type of thing is done in the business world all the time. Let's say Walgreen's decides for whatever reason they want to buy Rite Aid. It would be perfectly normal, since Walgreen's stock has value, to finance some of the deal through the issuance of new Walgreen's shares. Read the details of any merger on the business pages and it won't take you long to find a deal done in this sort of way.
The key is to have something people value. Imagine Rite Aid trying to print more stock to buy Walgreen's. It would get laughed off of Wall Street. Rite Aid is Greece.
The other key is not to overdo it so you end up going all Zimbabwe. That's where having a good monetary policy comes in. Strike the right balance, and in an ideal world, your borrowing costs stay low. In an unprecedented one, like today, your borrowing costs are below the actual cost of borrowing.
Sadly however, they're just gonna blow it on stupid army shit.
I couldn't agree more with your final premise, which is that however they get it they will blow the money on stupid shit.
As for the rest, I would find it more persuasive if the bond vigilantes had any actual power anymore. In theory, that's the difference between printing money and creating it by borrowing - investors have the ability to in a sense "vote" on your currency's power and affect your borrowing rates, so you'll know you're overdoing it when interest rates get too high which hopefully happens before you get to the wheelbarrow stage. At this scale, the market just doesn't have the ability to vote rationally, because it's a classic race to the bottom all the way around. And unlike actual voting, in this election you can't abstain. You have to use SOME kind of money. (You could always invest in commodities, but that market is a) too small to absorb the amount of money being created and b) rigged *against* investors, unlike the majority of markets which are rigged for them.)
Yes, investors can make Greece's life Hell, but that's because Greece can't control its money supply. The US is the least f'd up major economy that will absorb large amounts of capital (there are lots of smaller economies that are less f'd up but they won't allow their currencies to go ballistic.) Therefore, it's always going to win. This will be true until it isn't. Since this kind of thing tends to go in a "punctured equilibrium" kind of way, it will be true until it's extremely not true. (The technical term for this event is "dies Irae." :) )
The sad thing is, noble host, I really, really hope I'm wrong and you're right. However, in my experience when that happens it usually means I'm right.
Who knows about this and who is complicit with it. The government should investigate it's own fiscal policy. There needs to be a hearing. Where is the outrage? Time for a congressional hearing on this, whithout which we're going no where fast. Whatever the truth is the truth is. American's will be shocked and demand accountability when a judiciary comitee reveals how fundamentaly flawed our fiscal polict is.
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